Three hints to a potential selloff

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

The averages take baby steps forward as volume recedes for four days in a row. Volatility in the Nasdaq has contracted over the past two days after expanding in the several sessions previous.

There can be a tendency for some to overanalyze the market when it is in a trend. The truth is that there is not much to analyze at this point. The averages are in uptrends and leading stocks act well. Speculators should, in most cases, sit with their winners, at least until a position hits the 20% gain level at a minimum.

When institutions give the high sign, it will be time to raise cash and fasten the seat belts. This will be evident by distribution days on the charts of averages, and breakdowns in the leading stocks. At that point, the market will have likely begun an intermediate-term correction. These occur a few times in a bull market.

Speculators using a medium-term approach similar to the one discussed in these reports know that trafficking in leading stocks is a double-edged sword: Outperformance on the way up and underperformance on the way down. Specifically, leading growth stocks tend to go down from 1.5 to 2.5 times or more compared with the averages.

For this reason, an 8% decline in the averages is likely to saddle some of the speculative growth glamours with 20%+ setbacks. At that point, there is no guarantee that a leading light will return to its old high anytime soon. There are hints of what may happen when a selloff like that gets underway. But nothing is guaranteed.

Using the Apple (AAPL) example, hint no. 1 was a material slowdown in estimates for earnings growth in the current and next fiscal years. Hint no. 2 was abnormal liquidation. At that point, the dye was cast. Anyone bothering to look at a price/volume chart saw the liquidation going on.

Hint no. 3 was a break of the 50-day moving average. Institutions will often use the 50 as a place to add to winning positions. A break of the 50 on volume can many times be an ominous sign for a leading issue if it does not find support within two days' time.

It will be worthwhile for a speculator to watch for hints 2 and 3 above in the issues that he or she holds.

Among the names, Cornerstone Ondemand
CSOD, +2.18%
is emerging from a constructive pullback. If not for its earnings report due out Tuesday after the close, this would be potentially buyable near Monday's closing level. This is a fairly thin title, with just $9.1 million in average volume, and therefore represents higher risk.

Five Below
FIVE, -1.05%
operates a chain of teen-oriented discount stores. Most analysts see earnings growth in the January '13/'14 fiscal years coming in at 67%/40%. Price forms a tight flag after recently absorbing a secondary offering. The potential entry pivot for the stock would be Feb. 5's high of 38.78. Earnings are expected to be released in the next two weeks. On Jan. 15, the company lifted guidance. A reduced starter position could be taken above 38.78 pre-earnings, with the usual protective stop loss in place.

Invensense
INVN, -0.76%
a maker of ICs and software for consumer electronics devices, was profiled in Thursday's report. Monday, it rose 4% on volume 98% above average. This leaves it 29 cents from the pivot of 15.26, which is the Jan. 28 high. Aggressive speculators can consider entering on a takeout of this level, with a standard stop loss of 5%-7% below entry.

SPDR Gold Trust
GLD, +0.63%
has been under extreme distribution (large-investor selling) for weeks. Price bounced off the downward sloping 50-moving average line three times in recent weeks. This led to Monday's break of a triangle formation. GLD is expected to go lower from here.

LinkedIn
LNKD, -10.52%
staged a thunderous breakout Friday, up 21% on volume 648% above average, after smashing estimates late Thursday with its Q4 earnings report. Earnings estimates are pegged at 49%/47% for the '13/'14 years, per most analysts.

As has been mentioned here a number of times, the stock is extremely rare in that virtually no $17 billion market capitalization companies grow earnings at triple-digit rates, at least not in this environment, as LNKD has done in three of the past four quarters. Revenue growth has been 81% for each of the past two quarters. The most recent quarter showed 20% sequential revenue growth over that of the prior quarter.

For those who did not enter at either of the two suggested buy points, the stock is now extended above its most recent support area and does not offer attractive entry. A pullback or new base will need to materialize before another entry is deemed attractive. With this breakout, LNKD has replaced AAPL as the glamour of glamours, destined to be the subject of many debates, just like Amazon (AMZN) in '98, Qualcomm (QCOM) in '99, and AAPL itself more recently.

In summation, the averages chug higher. Speculators should not grow complacent with this tape. A few glamours approach buy points, but most are beyond buying range. For now, less thinking and more sitting is the order of the day.

At the time of this writing, of the stocks mentioned in this report, Kevin Marder or an affiliate thereof held a position in LNKD, though positions are subject to change at any time and without notice. The information contained herein may have been previously disseminated.

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